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1-
A good
manager... |
 A
good manager must not only be effective in the day to day
or short term performance of the business or unit under
his responsibility. He must also manage for the long run. For that he must be
able to define
and implement strategic direction, allocate scarce
resources efficiently, organize effectively, and create
excellence in his business. |
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2-
What is
strategic planning?
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Nowadays, stating that applying sound strategic
planning to a business is the major key to its success, sounds like a truism. Not long ago,
this was not so obvious. Only in the early 60's the
concept of corporate strategy was formally proposed by
R.Andrews, C.R.Christensen and E.P.Learned from the
Harvard Business School. The kernel of their proposition
is:
 Strategy is the aggregate of goals,
major policies and plans to achieve those goals.
They should be clear and specific on the
type
of business the company is in (or is planning to be in), and what kind of company it
is (or is planning
to be).
There are two basic and equally
important parts of strategy: formulation and implementation.
When formulating a strategy it is vital
to consider the opportunities existing or developing in
the market and the
strengths
and weaknesses of the company. |
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3-
Amazon.com:
Spotting
opportunities
existing or
developing
in the market.
Defining the type
of business |
You most
probably heard about Amazon.com. This young company was started to sell
books on the Internet. It is very successful (in sales,
not yet in profits). The basic strategic
formulation was very clear: Amazon.com was to be in
the business of selling a low-tech commodity -books,
through a high-tech medium -the Internet. This idea was a quick response to the
"opportunities existing or developing in the
market". |
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4-
Defining the
Amazon.
company:
Low price and
convenience
for a large
number of
customers |
What
kind of company was it going to be? The product they were
going to sell is a commodity, sold by many other
companies from the independent corner bookstore to the
giant chain Barnes & Noble. How could they be
different? The
answer was low price, convenience and customer service. They would offer:
Discounts on list prices (up to 30-40%)
The convenience for customers of buying from their homes
and getting delivery at their own doors.
An amazing number of titles (ca. 3 million) to choose
from.
Hunting down any book a customer demands, including
out-of-print titles, through a web of associated used
book dealers.
A website easy to understand, at the same time with
considerable depth, including book reviews.
Courteous and personal treatment of the customer, in
spite of the impersonal nature of electronic messaging:
thank you notes for orders, quick response to queries, a
liberal refund approach for returned merchandise, etc. |
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5-
Strengths and
weaknesses |
One important
weakness is to be an upstart in a relatively new market.
Also, it was obvious that eventually the giant bookseller
chains would copy Amazon.com's marketing strategy. The
awareness of these realities had to be offset by implementing a strategy, this being
Establishing
a strong brand identity and a broad base of loyal
customers quickly. This objective was reached; by the
time Barnes & Noble started to sell books online,
Amazon.com had amassed a base of 4.5 million customers
and the brand name was widely recognized. Reaching this
goal was not cheap; the company is still losing money,
and losing more as they sell more. The company, and many
investors who are driving the stock price higher and
higher, consider this not a loss but an investment. A way of "managing for the long
run". It could be argued that Amazon.com could make
a profit immediately by cutting costs: reducing the
number of titles, downsizing the work force, downgrading
customer service, etc. But management obviously thinks
that this would be a shortsighted strategy. Alienating
its customers would mean failure in the not-so-long run.
A couple of quotations from Jeffrey Bezos, Amazon's
founder:
"Word of mouth is incredibly powerful online; a
dissatisfied customer can tell 1,000 people in
minutes".
"I tell my employees that shouldn't be afraid of our
competitors -they are not the ones who give us money.
They should be afraid of our customers". |
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6-
Flexibility in
formulating and
implementing
strategy |
A
corporate strategy targeted at the long run growth in
sales and profits must be flexible and adaptable. Since everyone knows
that apart from death and taxes the only sure thing is
change, this also sounds as a truism. The big question
is, in
what direction should this flexibility go.
Amazon.com recently expanded their strategic plan, based
on selling only books, to include music CDs and gifts.
They are now leaders in CD sales. In this case, they
implemented flexibility by diversifying.
Other companies that are diversified may decide that they
would be more profitable by focusing on their main
strengths and core business. Being flexible, they respond
by selling or spinning off parts of the company.
There is no way to make sure which of this two forms of
flexibility is best; it depends on the company and the
business or businesses it operates, on the changes taking
place in the market, and on the available resources. |
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7-
Efficient
allocation of
scarce
resources |
Speaking
of available resources, we mentioned before the need of allocating
scarce resources efficiently as a must in managing for
the long run. And resources are almost always scarce; a
company never has an unlimited supply of talented people,
money, know-how, etc.
Allocating scarce resources has a macro and a micro
approach. |
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8-
The
Macro
approach
to allocating
scarce resources |
The
macro approach is aimed at a whole business unit. A business running
several different units must decide how much resources it
should devote to each of them. Let's use IBM as a case.
Their main units are mainframes, software, medium-range
computers, Personal Computers and Servers, Data
Communications, and Services. Some of these units are
growing and very profitable (Services and mid-range
computers), others are stagnant (PCs and servers, Data
Communications).
IBM has invested heavily in the PC business, with less
than stellar results. Several influential industry
analysts are advising IBM to stop investing in
development and production in this area, resorting to
reselling hardware made by other producers with the IBM
brand. The analysts argue that the resources made
available in this way should be invested in the growing
and profitable units. Seems IBM is listening; at the time
of this writing, it sold its data communications division
to AT&T.
Every day we read in the papers of companies that divest
(sell off) a business unit to invest the money in other
units where they have core strengths and better chances
of growing profitably.
Who buys those businesses? Mostly, other corporations
which think they can achieve synergy with these additions
to their own business. The mentioned case of IBM/AT&T
is a typical example.
Philip Morris acquired the Kraft food company to
diversify away from cigarettes. Kraft had a
billion-dollar bakery unit (bread, Entenmann's cakes)
which they thought did not fit with their other food
units. They sold it to CPC International (later named
Bestfoods), which merged it with its existing baking
business (bread, Thomas English muffins) expecting to
reach greater efficiency through synergy.
There is another reason to sell or spin off a business,
namely to allow management to focus on its core business. |
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9-
The
Micro
approach
to allocating
scarce resources
The technical and
the intuitive
approaches to the evaluation of
investment
projects |
The micro approach to
allocating resources is aimed at specific projects within
a single unit. A dynamic enterprise develops many
projects internally, and receives proposals from third
parties: new products, entry into new markets, better or
expanded production facilities, etc. Most of these
projects have merit. But, since available resources are
scarce, not all can be implemented.
There is a technical
approach
of evaluating and comparing projects; and then, there is
an intuitive
approach
based on management's vision.
The technical approach is based on several methods. Let's
consider a project proposing the launching of a new
product. It must cover a certain period (say, 5-10
years), and include sales forecast (volume) and the
estimated net selling price. This would yield the gross
revenue to be obtained.
On the other hand, all expenses must be calculated:
investment in production facilities, total production
cost, transportation and warehousing, promotion, etc.
Subtracting the latter total from the former, we obtain
the net cash flow (negative or positive) over the period.
Using the same method for competing projects, the ones
yielding a higher return on the investment can be
identified.
Usually managers look at the results of the technical
approach and then evaluate them with the intuitive
approach. They may decide to launch a new product which
is not the most profitable alternative, for tactical
reasons; to block the entry of a new competitor, to get
more shelf space for a specific product line on
supermarkets, etc.
On a deeper application of intuition (or business acumen,
or vision), a manager may see much more -or less-
potential in a business project than the technical method
shows.
In this way many a hit has been achieved.
In the early 50's hamburger stands were a low profit,
atomized industry. Most stores were not very clean, food
quality rather poor, customer service almost
non-existent. A 52-year-old mixer salesman named Ray Kroc
saw a restaurant which was different. It was clean,
serving good quality food efficiently produced and
staffed by neat waiters and waitresses. He eventually
made a deal with the restaurant's owners to use the name
and the business methods. McDonald's was born.
Howard Schultz got himself hired and then bought into a
small business in Seattle selling gourmet coffee beans.
The common wisdom was that serving espresso coffee was a
business for small independent neighborhood stores.
Schultz's vision was that there was high potential for a
chain serving high quality espressos in an attractive
environment and staffed by motivated attendants. He
opened espresso bars. You may have visited one of them;
the name is Starbucks.
These two very successful companies, McDonald's and
Starbucks, differed
in their strategic direction in one important aspect. The former expanded
mostly by franchising; the latter's stores are company
owned.
Since managers are human, their intuition is sometimes
wrong. IBM was offered the Xerox copier patent, Kodak the
Polaroid patent. Both companies rejected the proposals.
The inventors went ahead and started their own successful
companies.
Bill Gates offered IBM a majority stake in his upstart
Microsoft; Big Blue was not interested! |
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10-
Organizing
effectively |
Defining the
organization of a corporation is basically establishing
hierarchical functions, stating the tasks each function
is responsible for, and deciding at which level of the
hierarchy business decisions will be taken.
Some companies are highly centralized, all important
decisions being taken at the top. Others leave
considerable room for decision taking at lower levels.
Here again, there is no golden rule; it all depends on
the type of business, the company's culture, the
competition, etc.
Let's use two consumer product companies as an example,
Gillette and Bestfoods. Both sell their products in
almost every country in the world. But the former sells
shaving gear, the latter processed food products (Knorr
dried soup, sauces and bouillon, Hellmann's and Bestfoods
mayonnaise, among many others). This is an important
difference. Gillette's products are basically the same
everywhere; consumers have common attitudes towards
shaving in any country. On the other hand, tastes in food
are very diverse. A soup very popular in Taiwan would not
be accepted in, say, Brazil. Argentines like their
mayonnaise yellow and heavy, Venezuelans prefer it white
and light.
Accordingly, both companies are organized very
differently in the area of product development. Gillette
develops its products centrally, while Bestfoods leaves
product development responsibility and decisions to the
affiliates in each country or region. |
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11-
Creating
excellence
in the business...
Why? |
Never in the past has the marketplace
been as competitive as today. Capital is available
worldwide for startup companies, expansions and new
product development. For those goods and services that
can be exported, globalization -the fall of barriers to
international trade and to capital investment- means that
most companies no longer compete just with rivals located
in their markets, but with the whole world. Be it cars,
toys, shoes, or whatever, a local producer must compete
in price, quality and service with rivals in China,
Taiwan, Korea, Germany, you name it. E-commerce via
Internet is dramatically growing, allowing customers to
look for the best price and quality from merchants
located in any part of the world, regardless of where the
buyer lives. In short: the power has shifted
from the manufacturers and retailers, to the consumers.
Also, for companies whose shares are traded publicly, the
pressure of investors for profits is growing. Managers
must keep investors happy or see their company's shares
(and their own bonuses, and stock options) fall. Or lose
their jobs.
These are some of the reasons why creating excellence in
the business is a vital task of management. Very simply
put, "create
excellence or perish".
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12-
Creating
excellence
in the business...
where? |
Excellence (also called
"Total Quality") must be pervasive! That is, it must exist
in all and every aspect of the business, and must involve
employees at all levels.
Day to day operations, strategic planning, adaptability,
innovation, product cost and quality, marketing and
selling, customer service, etc. must continuously evolve
to higher levels of excellence.
Employees from the top manager to the last factory
worker, clerk, phone operator, waiter; all of them must
work towards excellence in their performance. It's like a
symphony orchestra. To give a good concert, the conductor
must be excellent, the instruments too, and each and
every musician also. One single under-performing player
may ruin the show. In the same way, a rude phone operator
service agent may cause customers to go elsewhere. As
Amazon's Bezos said, "(online) a dissatisfied customer can tell 1,000
people in minutes". |
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13-
Creating
excellence
in the business...
who? |
The inspiration and the driving force to
create excellence must come from the top. If the top
manager is not convinced of its importance, or does not
have the talent to implement it, the company will not
achieve it.
If this first condition is met, the tough job of
achieving "continuous improvement" can be
tackled.
As always, the key is people.
A management team with the talent and conviction to
implement excellence must be trained, hired and
assimilated at all management levels.
At lower levels, all personnel must be selected, trained
and motivated in accordance with this philosophy.
Good informal relationships within and across authority
levels must be encouraged. There are many good reasons
for that, especially because it ensures the flow of
information and valuable suggestions to the decision
levels.
Effective controls and measurements must be implemented
to monitor the level of excellence. This applies to every
aspect, from the quality and cost control of manufactured
goods, to the satisfaction of customers of a hotel chain. |
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14-
Vision,
rewards,
measurements |
One effective way to
motivate people to reach for excellence is defining and
"selling" to all employees a vision of the company's
objective. What do we want to be? The vision Bestfoods
has and propagates to all employees at all levels is
"to become the best international food company in
the world". This is completed by a brief summary of
how this objective can be reached.
Also, an
effective motivation tool is rewards: recognition, stock
options, bonuses tied to performance, etc.
As for measurements, several companies are following the
"balanced score card" method proposed by an
article in the Harvard Business Review some time ago.
Each employee has a list of the tasks he performs, with a
measurable objective to be reached in a given period. The
results are reviewed periodically and, in many instances,
rewards are tied to results. |
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15-
The End |
This is the end of Long Run
Strategic Management.
If you care to comment on this course, we'll appreciate
it. Kindly email us at comments@mbaii.org
When you are ready take your self-evaluation
test below. |
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